Relationships Between Oil Shocks and China's Price: An Empirical Analysis Based on VAR Model

The main purpose of this paper is to investigate the impacts of fluctuations in international crude oil prices on China's CPI and PPI and its pathway. In order to quantifying their impact and transduction pathway, Granger causality test and the VAR model impulse response function were used in this study. The time span of the data used in this paper was from January 2001 to April 2014. Through empirical analysis, the main conclusions of this paper are: (1) the volatility of the oil price has a direct impact on the PPI, and has an indirect impact on the CPI. At the same time, PPI has a direct impact on CPI. (2) The volatility of the oil price is the one-way Granger cause for the change of PPI, while PPI is the one-way Granger cause for the change in CPI. The corresponding policy implications are: (1) government should not only strengthen the system of inspections and predictions about the international crude oil price fluctuations, but also develop our own oil futures markets as quickly as possible; (2) government should expedite the development of the domestic oil pricing mechanism. The market-oriented pricing mechanisms should be adopted for the timely adjustment of domestic oil prices; (3) In order to remove the institutional barrier in the propagation path of crude oil prices, the government needs to actively introduce private oil enterprises to participate in market competition, thus breaking the deadlock of the monopoly existing in the oil production and supply.